Regional Economic Issues in CESEE JVI Lecture, Vienna, February 8, 2017 Bas B. Bakker Senior Regional Resident Representative for Central and Eastern Europe
Outlook for CESEE 2
Within CESEE dichotomy: CIS was in recession, but non-cis fairly strong 10 PPP weighted real GDP growth (Percent) 8 6 4 Other CESEE 2 0-2 -4 CIS -6-8 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3
CIS was hit by oil price decline, sanctions and conflict in Ukraine, but is now recovering Real GDP growth in Russia, other CIS countries and changes in oil prices (Percent, y/y) 15 100 15 10 75 10 5 0-5 -10 RUS Oil prices (right axis) 50 25 0-25 -50 5 0-5 -10 UKR RUS BLR -15-75 -15-20 2005 2007 2009 2011 2013 2015-100 -20 2005 2007 2009 2011 2013 2015 4
By contrast, EU new member states continue to recover from 2009 crisis 30 25 20 15 10 5 0-5 Real GDP per capita growth, 2008-16 (Percent) -10 SVN HRV CZE HUN EST LVA ROM BGR SVK LTU POL 5
October 2016 WEO projections: pick-up in CIS in 2017, and continued strong growth in rest of CESEE 6 GDP growth (Percent) 5 4 3 2017 2016 2 1 0-1 -2-3 -4 BLR RUS UKR EST HRV MDA HUN MKD SVN CZE SRB LVA LTU BIH BGR POL ALB SVK UVK ROM MNE 6
After projections were made Donald Trump was elected, which was not quite expected by markets 7
Since the election there has been a sharp increase in US long-term interest rates 3.0 2.5 10Y Government Bond Yields (Percent, 5-day moving average) US Elections 2.0 1.5 USA 1.0 GBR 0.5 0.0 DEU -0.5 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 JPN 8
as financial markets have become more optimistic 115 Stock Market Indices (Day of US Elections=100, 5-day moving average) US Elections 110 105 EuroStoxx 50 S&P 500 100 95 90 Nikkei 225 85 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 9
Dollar appreciated strongly 104 Exchange rate of USD against G20* currencies (Day of US Elections=100, GDP-weighted) US Elections 103 102 101 100 Emerging Markets of G20 99 98 97 G20 countries 96 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 *DEU, FRA, ITA and EU are replaced by EA. 10
Financial conditions for EMs have tightened, but spreads broadly unchanged Emerging Market Bond Index Plus 7 Yield (Percent) US Elections 500 Spread (Basis points) US Elections 450 6 EM composite EM composite 400 350 5 300 4 Emerging Europe Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 250 Emerging Europe Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 11
In CESEE, exchange rates have depreciated visà-vis dollar, except RUB (oil prices up) 130 125 Exchange rates of USD against selected currencies (Day of US Elections=100, 5-day moving average) US Elections 120 115 110 PLN HUF 105 RON 100 RUB 95 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 12
Markets seem to anticipate US fiscal stimulus and higher US growth. What does this mean for CESEE? Stronger US growth Will boost exports, but at risk of more protectionism May boost commodity prices Stronger dollar Helps exporters Negative balance sheet effects for dollar-indebted Higher financing costs Hurts countries with weak growth May help countries that are advanced in the cycle 13
For CESEE overall impact likely to be modest But this will depend on US policies, which are not quite clear at this stage. There are also risks: Increase in US protectionism, which could lead to trade war With already low unemployment, large fiscal stimulus could lead to much faster than expected monetary tightening. 14
Indeed, projections for CESEE roughly unchanged 3.5 3.0 2.5 2.0 GDP growth in 2017 according to different WEO vintages (Percent) WEO Oct-16 WEO Jan-17 1.5 1.0 0.5 0.0 CIS Euro area Baltics CE-5 SEE non-eu SEE EU 15
Bigger risk may be Europe. Unhappiness with EU has increased sharply in past decade Level of confidence in the European Union (Percent of population surveyed by Eurobarometer) 16
Further fueled by concerns about migrations and economy Most important issues facing the EU countries in 2016 (According to Eurobarometer) 17
There are a number of important elections in 2017 French presidential elections German federal elections Dutch general elections (Possibly) Italian general elections 18
How will this affect further expansion to Western Balkans? 19
Remaining and future challenges 20
The 2009 crisis was deep, but most CESEE countries have recovered to above pre-crisis levels 30 GDP growth per capita, 2008-16 (percent) 20 10 0-10 -20-30 GRC UKR ITA SVN HRV PRT ESP RUS SRB CZE HUN EST MNE BIH LVA BLR ROM BGR SVK MKD LTU ALB MDA POL 21
Unemployment in the EU New Member states is coming down rapidly Cumulative changes in unemployment rate (2008Q1=0, seasonally adjusted) 14 14 12 10 LVA 12 10 8 LTU 8 HRV 6 4 2 0-2 POL EST CZE HUN SVK 6 4 2 0-2 SVN BGR ROU -4 2007 2009 2011 2013 2015-4 2007 2009 2011 2013 2015 22
However, there are crisis legacies Financial sector: High share of non-performing loans Government sector: Rebuild fiscal buffers 23
Clean up banks balance sheets: NPLs have come down (although they are still high in SEE and Ukraine) 35 Non-performing loans to total loans, 2016 (Percent) 30 25 20 2012 15 10 2016 5 0 EST TUR LVA POL SVK CZE LTU MKD SVN RUS HUN ROM BLR BIH MNEMDA HRV ALB BGR SRB UKR Note: for MNE and BGR data for 2012 and 2015. 24
How to deal with high NPLs? 25
Fiscal deficits have declined to more modest levels Fiscal balance (Percent of GDP)
But public debt is no longer low Public debt (Percent of GDP)
In past 25 years, region has made tremendous progress 28
But more recently, convergence has slowed 70 60 Real GDP per capita (Percent of Germany) CE-5 50 Baltics 40 30 SEE EU CIS 20 10 SEE non-eu 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 29
Employment to total population ratio (percent) Further convergence will require both higher labor input and labor productivity Labor productivity and employment to total population ratio, 2015 60 50 40 30 20 10 0 Flags size reflects GDP per capita in 2015 (PPP-adjusted). 0 10 20 30 40 50 60 70 80 90 100 Labor productivity (PPP adjusted 2014 USD, thousands) 30
Labor input looks relatively high, but this is partly because a large share of the population is between 15 and 64 (working age) 72 71 Population ages 15-64 (percent of total population) CIS 70 69 68 67 66 SEE non-eu CE-5 SEE EU Baltics Germany 65 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Note: Simple average of given countries. 31
Employment rate (percent of working age pop.) If we compare employment to working age population rate differences in labor input with Germany are more pronounced Labor productivity and utilization, 2015 90 80 70 60 50 40 30 20 10 0 Flags size reflects GDP per capita in 2015 (PPP-adjusted). 0 10 20 30 40 50 60 70 80 90 100 Labor productivity (PPP adjusted 2014 USD, thousands) 32
Indeed, employment rates are still well below Germany with the exception of Baltics 80 Employment rate (percent) 50 75 DEU 45 Baltics 70 40 SEE non-eu 65 CE-5 35 60 SEE EU 30 55 CIS 25 50 2000 2002 2004 2006 2008 2010 2012 2014 20 2000 2002 2004 2006 2008 2010 2012 2014 Note: Simple average of given countries. 33
Aging will accelerate in the next decade Working age (15-64) population growth (percent) 34
Emigration exacerbates the labor supply problem 35
MDA BIH BLR HRV SRB UKR BGR ALB POL HUN ROM SVN LTU MKD SVK LVA RUS EST CZE DEU BIH MDA MKD ALB SRB ROM UKR POL HRV HUN SVK BGR BLR CZE SVN RUS LTU LVA EST DEU It will be important to increase labor force participation, including of women Labor force participation rate, 2015 (percent of either male or female population ages 15-64) 90 Male 90 Female 80 80 70 70 60 60 50 50 40 40 30 30 36
GDP per capita While higher labor input will help, higher capital stock and thereby labor productivity may be even more important 90 80 70 Capital stock and GDP per capita, 2015 (thousands of 2010 EUR) y = 0.3451x + 1.6927 R² = 0.8514 LUX Employment to population ratio and GDP per capita, 2015 (percent and thousands of 2010 EUR) 90 80 70 y = 0.7094x - 6.5368 R² = 0.0276 LUX 60 60 50 40 30 20 10 0 IRL BEL DNK SWE GBP DEU NLD ITA FIN AUT SVK CYP FRA MLT LVA SVN ESP POL PRT GRC LTU ESTCZE HRV BGRROU HUN 0 50 100 150 200 50 40 30 20 10 0 IRL DNK SWE NLD GBP BEL FIN DEU AUT ITA FRA CYP MLT ESP SVN GRC CZE SVK PRT POL HUN LTU EST HRV LVA BGR ROU 35 40 45 50 55 Capital stock per capita Employment to population ratio 37
However, growth of capital stock has slowed 12 11 10 9 8 7 6 5 4 3 2 1 0-1 Net capital stock per worker growth (3-year annualized change, percent) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ROM EST CZE SVK HUN 38
as investment rates post-crisis are (too) low. 35 30 Investment to GDP ratio, 2015 (percent) Emerging markets and developing economies 25 20 15 10 5 0 UKR BIH SRB HRV SVN POL LTU BGR HUN RUS LVA SVK MDA EST ROM CZE MNE ALB UVK BLR 39
Low investment not only problem: TFP growth has slowed as well Average total factor productivity growth (percent) 40
So what should be done? 41
Address factors that might constrain productivity (REI May-16) Insufficient protection of property rights and Inefficient legal systems and other government services Limited access to financial services (e.g. for SMEs) Infrastructural gaps 42
Improve public investment management and tax administration (REI Nov-16) Closing efficiency gaps in public investment and tax collection could bring sizable benefits. Further upgrades of public investment management should focus on improving allocation and implementation frameworks and procedures. Improvements in tax administration should aim at reducing compliance gaps. Design of reforms should include elements that help reduce resistance to reforms and build the support base for their successful completion. 43
Thank you